Surplus Lines’ Multistate Clearinghouse Numbers Don’t Work

Recent data from Florida indicate that the economics for a multistate surplus lines tax allocation clearinghouse are unworkable. There simply is not enough multistate surplus lines tax to support the cost of a clearinghouse.

This is not new information. (See “Much State Regulatory Ado About Little,” Insurance Journal Jan. 24, 2011.)

With the Nonadmitted and Reinsurance Reform Act, (NRRA) effective July 21, 2011, Congress sought to establish a uniform nationwide system of home state taxation and regulation of surplus lines transactions. Surplus lines brokers would remit premium tax to the home state based on 100 percent of the Home State’s tax rate.

In response to state concerns that their premium tax revenues might suffer under home state taxation, Congress offered states the option of creating a mechanism for reallocating premium tax revenues among themselves.

Twelve states (AK, CT, FL, HI, LA, MS, NE, NV, PR, SD, UT and WY) joined NIMA (Nonadmitted Insurance Multistate Agreement) to establish a clearinghouse to redistribute surplus lines premium tax among participating states. NIMA states selected the Florida Surplus Lines Stamping Office (FLSLSO) as the clearinghouse.

The NIMA clearinghouse was intended to be operational in September 2011. That date slipped, and the NIMA clearinghouse is re-estimated to become operational on July 1, 2012, about one year after the effective date of the NRRA.

As required by Florida statute, the Florida Office of Insurance Regulation (FLOIR) submitted a report to the Florida Legislature on Dec. 30, 2011, reporting annualized FLSLO multistate premium allocation results for 2011. Total premium tax collected and reallocated was $2.589 million. Of that grand total, $2.464 million (95.15 percent) was allocated to Florida. The 11 other NIMA states collectively received $125,555 (4.85 percent).

Multistate premium taxes allocated to non-Florida NIMA participants ranged from a high of $40,632 for Louisiana to a low of $230 for Wyoming. These numbers are not in millions of dollars. Nebraska, which was allocated $11,654 per the FLOIR Report, recently withdrew from NIMA. Other states may soon follow.

The FLOIR Report notes estimated clearinghouse startup costs of $2.8 million and that the clearinghouse will charge the same 0.3 percent service fee presently charged by the FSLSO. But the FLOIR Report data reveal only part of the picture. The true economics require consideration of at least three more factors:

• The FLOIR Report does not reflect the amount of home state premium tax that each NIMA state is required to allocate back to the clearinghouse. This means that a NIMA state’s net share of clearinghouse premium tax revenue is less than shown in the FLOIR Report; the net share for some states might be negative.
• Participating states necessarily must incur costs to monitor and audit their share of premium tax revenues, thereby reducing their net premium tax revenues. Those costs are not reflected in the FLOIR Report.
• The complexity and frequent changes to NIMA allocation formulas likely result in some amount of premium tax not being reported due to inadvertence or otherwise.

Applying a clearinghouse “service fee” of 0.3 percent to the Florida data produces a total annualized service fee of $157,101 – a cost of $31,546 more than the amounts of premium tax allocated to non-Florida NIMA states. If the Florida data are any guide, clearinghouse solutions would appear to be a “lose-lose” proposition for state treasuries.

In the meantime, surplus lines brokers are incurring substantial unnecessary costs to slice and dice multistate premium taxes in anticipation of a clearinghouse. Premium taxes collected in the absence of a clearinghouse are not being banked for future redistribution. These premium taxes will never be shared.

Last and apparently least, the consumer receives no benefit from a multistate tax allocation clearinghouse. The consumer, however, ultimately will bear the systemic costs of a clearinghouse through increased fees, taxes or other charges.

The multistate clearinghouse approach disserves state treasuries and the consuming public. Under the NRRA, there are no frictional costs. One hundred percent of multistate surplus lines premium tax is paid to the Home State at its tax rate.

Given the capital in startup investment, operating costs and frictional costs associated with a clearinghouse, state treasuries will fare better under home state taxation. So will consumers.